MBIA, Ambac jump on positive S&P actions

AlistairBarr

SAN FRANCISCO (MarketWatch) -- MBIA Inc. and Ambac Financial shares jumped on Monday, spurring a broader market rally, after Standard & Poor's took positive rating actions on their bond-insurance businesses and said the companies' efforts to raise capital are bearing fruit.

Ambac shares jumped 16% to close at $12.41, while MBIA shares surged 20% to $14.58. The news also sparked a rally in the broader stock market.

S&P affirmed Ambac's
ABK, +0.00%
AAA rating. The company is currently about $400 million short of the capital it needs to keep that top rating. But if Ambac successfully raises at least $2 billion of new capital through a rights offering to existing shareholders, that would more than cover the shortfall, the agency said.

"The current shortfall is a relatively modest number related to the size of the company's capital position," Dick Smith, a bond insurance analyst at S&P, wrote in a note to investors. "Should Ambac not execute its current capital plan, other actions, such as reinsurance transactions, could eliminate the shortfall, at least in part."

The insurer's rating remains on CreditWatch with negative implications because the company's plans and risk profile are still uncertain, S&P added.

At the same time, the ratings agency took MBIA's
MBI, -6.64%
AAA rating off CreditWatch because of the company's success in boosting claims-paying resources by $2.6 billion recently.

MBIA's success is "a strong statement of management's ability to address the concerns relating to the capital adequacy of the company," S&P's Smith said. "It is also a strong statement by investors of their understanding of MBIA's franchise value and business practices."

MBIA is also trying to boost claims-paying resources by buying more reinsurance and will probably succeed with that plan, S&P added.

Ambac and MBIA have been trying to raise capital to preserve their AAA ratings, which have been in question because of concerns about losses from guarantees the companies sold on complex mortgage-related securities known as collateralized debt obligations (CDOs). Without those top ratings, their businesses may be imperiled.

A group of eight banks that are major counterparties to Ambac is close to agreeing on a plan that would inject new capital into the bond insurer, two people familiar with the situation said on Friday.

The plan could raise $3 billion in new capital, according to a Wall Street Journal. It would involve the sale of new shares to existing investors at a discount, raising roughly $2.5 billion. That offering would be backed by the eight banks, which will agree to buy any unsold shares, the newspaper said.

Another $500 million would be raised by selling debt, probably surplus notes, the Journal added.

"We've been working with the company through a variety of capital raising ideas. The one that's recently been reported has a lot of positives to it," said Wisconsin Insurance Commissioner Sean Dilweg, who regulates Ambac's bond insurance unit. "If this proposal comes to fruition, this shows that the market is really working. We're awaiting the final steps."

"This S&P AAA affirmation agrees with everything that we've seen so far," he added.

Splitting

Dilweg also said separating Ambac's municipal bond business from its riskier structured finance business is also still being considered as part of the plan to inject capital into the company.

"When you bring in equity into a company and are separating the muni side and structured finance side, that's very doable," he said, noting that Ambac has a subsidiary called Connie Lee that could be used to take on muni risks and is already licensed in 47 states.

Dilweg stressed that his department will be watching carefully to see how the new capital flows into different Ambac businesses.

"We have a commitment to all policyholders," he said. "So we'll be looking at what part of the capital goes into the good book versus the bad book."

MBIA also said late Monday that it will split its muni business from its structured finance unit, but over a longer, five-year time period. It's also suspended taking on any new structured finance risks for six months.

"My goal is to retain the highest ratings that we can for both our structured and public finance businesses, and I believe this can be accomplished by separating these two business lines and leaving the derivative market to the traders on Wall Street," Jay Brown, chief executive of MBIA, said in a letter to investors which was released publicly.

MBIA eliminates dividend

MBIA also said late Monday that it will stop paying quarterly dividends, saving roughly $174 million a year. Brown also warned that MBIA may take another charge during the first quarter related to the market value of some of the company's credit derivatives transactions.

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